Withdraw From Funds With Care

By Ray and Dana Brandon

Ray’s Take While you’re allowed to withdraw funds from your tax-qualified plans as early as age 59 1/2, many people delay making withdrawals until they have to, at age 70 1/2. There certainly can be advantages to deferring that tax liability those extra years if there are other assets available for retirement. However, if you fail to make required minimum withdrawals (RMDs) then, the penalties are substantial – a whopping 50 percent tax above the regular income tax.

Fortunately, most banks, brokerage houses and mutual-fund providers notify you in that crucial year, and every year afterwards, letting you know just how much you need to withdraw based on tables provided by the IRS based on your life expectancy.

Why this insistence on making withdrawals? Because funds you have in these accounts have never been taxed and now Uncle Sam is ready for his share. One big exception is Roth IRAs, because those funds were already taxed. Another exception: if you are still working, there is no requirement to withdraw from that company’s 401(k) plan, but you do have to withdraw from any other qualified plans you did not roll over.

If, like many people, you have multiple IRAs or 401(k)s, you do not need to make pro rata withdrawals from each account, however, you do need to withdraw the total RMD. This offers a planning tool for careful investors. You can try to maintain a specific asset allocation by using the annual RMD opportunity to make adjustments rather than letting things be set automatically.

Of course, all these are general guidelines, and the reality must be analyzed on a case-specific basis. If ever there was a time to get professional financial advice, this is it.

Not only do you want to be sure of avoiding that 50 percent penalty, you also need to develop a plan to minimize your tax exposure over the years while still providing you with the funds you need for a comfortable life. One last thing, try to get in the habit of checking your beneficiary designation with every RMD. It’s important.

Dana’s Take While the RMD is mandatory at 70 1/2, remember that is the minimum, not the maximum you can withdraw. You might take a close look at your total financial picture and then consider the costs of the lifestyle you want to maintain before making decisions.

If you want to take advantage of these earlier retirement years to travel extensively but plan to live more quietly later, you might need to access more funds at first. However, if you dream of leaving your descendants a substantial inheritance, you’ll want to be more cautious with your withdrawals.

It will take a lot of calculations, including factoring in inflation and a cushion for the unknown, but planning for your future doesn’t stop with retirement. It lasts as long as you do.

Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at raybrandon@brandonplanning.com.